The Changing Landscape of Small Business Lending

The world of small business lending has changed a lot over the last few years. In many ways, these changes have been a good thing for business owners.

As traditional lenders have moved upstream, a new cadre of non-bank small business lenders are leveraging technology to make the small business application process more streamlined and capital more accessible than ever before. In much the same way that companies like Amazon, Kayak and Uber have changed the way we shop, travel and even hail a cab, these online lenders are changing the way small business owners get a small business loan.

What’s Changed?

Many small business owners can’t just walk into the bank and apply for a one-size-fits-all small business loan anymore. That being said, there are lenders that offer a variety of loan products specifically designed to follow a business through its life cycle from early-stage, growing and established business—it’s just a series of options rather than a single catch-all loan product.

A business owner will need to evaluate their situation, match their loan purpose to the loan that best meets that purpose, and evaluate their business credit profile to determine where they might have the best odds of success. Thanks to advancements in technology and new approaches to business lending, it’s not an overwhelming task.

Here’s a look at what’s changed over the last few years and what you should know when you’re looking for a loan and evaluating your options:

Online Lenders: Some of these lenders are using technology and web-based tools to streamline the application process and increase the speed with which they can distribute funds. After completing a short application, a business owner can often know in just a few minutes whether or not his or her loan application is approved. Sometimes, they can even have money in their account as quickly as within 24 hours.

Nevertheless, an online application is only part of the equation; some of these lenders also take a fundamentally different approach to how they evaluate creditworthiness by looking beyond heavy reliance on a business owner’s personal credit score and including other data to assess a healthy business. This makes it possible for borrowers with a less-than-perfect credit profile to potentially qualify for a small business loan—provided they can demonstrate a strong and healthy business.

Most of these lenders require at least a year in business and annual revenues of $100,000 or more, so they usually aren’t a good fit for early-stage startups.

Crowdfunding: These online platforms allow a business owner to get his or her business idea in front of a lot of people who might not otherwise hear about them. A borrower’s creditworthiness is typically not a consideration when launching a crowdfunding campaign, but a business idea with popular appeal along with an ability to effectively motivate the crowd to donate to their cause is often the difference between those who are successful and those who aren’t.

There are two types of crowdfunding available: gift- or premium-based crowdfunding or investment-based crowdfunding. The oldest type of crowdfunding is premium-based. The entrepreneur, in exchange for capital, offers some type of gift or premium—possibly early access to a prototype—in exchange for a contribution.
Investment-based crowdfunding involves offering a small percentage of ownership equity in exchange for an investment. This type of crowdfunding is currently available to those the government identifies as “accredited” investors, but will be expanding to “retail” investors.

Crowdfunding is an option for startups and other early-stage companies because years in business, revenue and credit profile may not be part of the equation (except with respect to investment crowdfunding). However that doesn’t mean that crowdfunding is easy—the business owners who look at crowdfunding the way they would pitching an investor and put the same level of effort into it, are those who are more likely to meet their crowdfunding goals.

Loan Matching Sites: Although loan matchmakers don’t actually make loans, they do introduce small business owners to lenders that offer a variety of loan products. After completing a brief online profile, the matchmaker will connect the business owner with lenders within their network who are looking for borrowers with similar profiles. The SBA’s LINC program is an example of what the SBA is doing to match qualified borrowers with SBA lenders in their area. This is another way to get a small business in front of multiple lenders they might not otherwise be aware of.

Because these sites filter out lenders when the borrower doesn’t meet their profile requirements, it can streamline the process of searching for a loan—particularly if the business owner isn’t sure where to start. However, using certain matchmaking sites can generate a lot of email communication and phone calls from multiple lenders since completing a profile is inviting interested lenders to make contact.

Non-Profit Lenders: A growing number of non-profit lenders offer financing at very low or no interest to small businesses. They are typically microloans to very small businesses that can leverage smaller loan amounts (typically $5,000 to $25,000—the SBA’s microloan program includes loans up to $50,000) to yield big results. Because these lenders are often mission-driven, a business owner with a mission to grow jobs and benefit the community may improve the odds of success.

This type of financing can be another option for a startup or early-stage company where the lack of a track record, or a short time in business, puts other loan options out of reach.

Online Invoice Financing: While invoice factoring really isn’t new, a new generation of online companies is using technology to handle the entire process online. This makes it easier than ever to factor outstanding invoices (basically selling your accounts receivable at a discount) for money today instead of waiting for customers to pay their invoices. If a business owner does a lot of business and invoices their customers, depending on the creditworthiness of those customers and the size of the invoices, this can be an option to fill short-term cash flow needs.

Although the creditworthiness of the customer is more important than the business’, these lenders are looking for a regular stream of larger invoices, which might not make this a good option for very young companies.

The local bank remains a good option for those business owners that qualify, but for those who can no longer turn to traditional sources of financing or those who need answers and capital quickly, there are more options available today than ever before.

Small business borrowers need to be savvier today about the financing they need for their businesses. It’s important to understand “Which of these options is a likely fit with my loan purpose?” In many cases, it could be more than one.

Ty Kiisel is a contributing author focusing on small business financing at OnDeck, a technology company solving small business’s biggest challenge: access to capital. With over 25 years of experience in the trenches of small business, Ty shares personal experiences and valuable tips to help small business owners become more financially responsible. OnDeck can also be found on Facebook and Twitter.